BANKS ENDURE FED WAITING GAME / THE WALL STREET JOURNAL

Banks Endure Fed Waiting Game

As second-quarter earnings season gets under way, bank stocks look to the Fed to start raising rates

By David Reilly

Updated July 12, 2015 7:57 p.m. ET 
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Federal Reserve Chairwoman Janet Yellen last month. On Friday, she reiterated that the Fed could raise rates later this year. Photo: MANUEL BALCE CENETA/ASSOCIATED PRESS

 

Bank stocks have their engines revving. If only the Federal Reserve would flash the green light.
Investors got an idea in the second quarter of what lies in store for bank stocks when interest rates start rising. The KBW Nasdaq Bank Index outpaced the S&P 500 by about seven percentage points in the quarter. That happened as long-term yields marched upward on the increasing probability of the Fed finally beginning to raise rates in September.

Since the end of June, though, global forces—Greece and China, chiefly—have buffeted yields and bank shares. Although that pressure abated at the end of last week, it still has bred doubt about the Fed’s timing. Chairwoman Janet Yellen reiterated Friday that the Fed could raise rates later this year. But Fed-funds futures imply a far greater chance of a first increase in December rather than September.

        

The Fed’s timing is vital for banks: A rising-rate environment would allow for increasing profits on the back of expanding net interest margins, or the difference between what banks make borrowing and lending money. Banks have for some time watched those margins get ground down even as steady loan growth hasn’t been robust enough to make up for it.

With J.P. Morgan Chase JPM 1.42 % & Co. and Wells Fargo WFC 1.05 % & Co. kicking off bank-earnings season this week, investors can expect the same sort of push and pull on second-quarter results. There may have been some stabilization of margins given rising yields. Yet revenue growth likely remained tepid. So banks may be forced to squeeze expenses even harder. 

                                                       

That leaves investors waiting on the Fed, with the added worry the potential benefit from a rate rise is already priced into bank stocks.

On that score, there is reason for optimism. The banking sector is now better positioned for rising rates based on its mix of assets than it has ever been, Goldman Sachs analyst Richard Ramsden noted recently. He estimated the amount of bank assets minus liabilities that reprice within one year is more than twice what is was on the cusp of the rate-tightening cycle in 2003 and 2004.

So even if the wait proves longer than investors were expecting, there may still be reason to cheer the race eventually getting under way.